What is the future of commercial retail and office space?

Question

With more and more companies moving towards remote employees and eCommerce stores, how will commercial property owners pivot as vacancies rates increase nationwide?

(Obviously WeWork is not the solution)

Greg Dickerson · Answer

It's a market and property specific issue. Some areas are holding strong and increasing space in certain locations others are seeing lots of vacancy. Malls are particularly struggling in a lot of areas. Some properties are converted to residential, senior living and multi family, some large big box are becoming storage or office warehouse. It’s really all over the map.

Jacob Dawson · Answer

Hello Arian, Before I start, I want to say that I am a retail broker based out of Chicago.

I think retail is not dead and will not die. But it is changing. Retail used to be a place where you go shopping, spend your time, etc. Now the experience is more centered towards getting in and get out (that statement applies to small strips and larger malls). Retail is moving to an "amazon resistant model" Think service-based locations where you get your medication, pick up food, or an escape room. We still have the A, B, and C class centers like before. But your A class centers are moving towards your name brands like Whole Foods anchored center with a CVS on the lot. The midwest has fantastic cap rates for retail (7% cap for an excellent anchored center 9% cap if your buying in a more speculative environment)

I hope I answered your question about retail. If you have any more feel free to ask away!

Joel Owens · Answer

To have a meaningful discussion you can't lump in commercial retail and office space. Those are Universes apart on many different levels.

Also can't be comparing 1,000,000 sq ft malls to neighborhood street retail 20,000 sq ft and under. Malls are readapting if location is good to great. The owner has to decide whether to refresh a mall for 1 billion in costs or more or change the use for cheaper to something else that long term might be more viable for that area.

If it's an old mall in weak suburban to rural area then much more limited on what can go there or be changed to. If you get  a cold belt area that is weak suburban to rural with population declining and net migration moving to warm belt states then those properties could sit vacant for years. I like reposition plays for myself in strong markets. I try to never buy properties because they are cheap in bad locations. I want the reason the property is a good deal to be other than that.

David Pierce · Answer

Vacancy rates outside of large big box retail space are kinda normal.

Jeff Kehl · Answer

@Sarah Waterman I think it somewhat depends on the type of user. I have a lot of medical and non-profit type tenants that require meeting with clients that will still need the physical location at least for the forseeable future.

Sarah Waterman · Answer

@Anné Erickson

I agree with you that in the foreseeable future there will be more work at home employees than ever before

If the footprint for the commercial investor is shrinking, how are they going to continue to maintain and increase vacancy rates to stay profitable?

Yes there's a subset of investors that are buying up commercial properties left right and center.  I don't know how they think they're going to keep their buildings occupied, do you?

Are there some kind of crazy tax loopholes that I don't know about?

Anné Erickson · Answer

The office market will soften and vacancy rates will increase based on the market impact of COVID-19. The degree of impact will depend on the overall economic hit of this pandemic. I expect once we all return to our offices, we will see a decrease in square footage requirements as employees push for partial work from home policies.

Anné EricksonOffice Brokerage, JLL

Bjorik Mutize · Answer

Sorry if i am posting in a dated thread but i agree with @Joel Owens tough to combine comparison

In my opinion this is just a stronger punch to retail than what was already coming. You are seeing the strongest thrive (grocers, walmart, target etc)...so not all retailers are struggling, there are some well positioned. Those retailers just mentioned are getting a huge push from demanded product. Big fan of Walmart's strategy. Office is still a good asset class, will most likely soften a bit. Vacancy will rise. Maybe this work from home trend will continue and less office footprint will be demanded.

David Levels · Answer

@Joel Owens Thank you for the insight.

I am a bit of a newbie. I know the basics, but what criteria and metrics constitute a strong market for your, personally?

Joel Owens · Answer

Anyone thinking of buying in Chicago be very careful. It's a cold belt state with more limited growth than warm belt states. The property taxes in certain counties because of the pension crisis can be very high.

This can affect STNL and MTNL owners there. If STNL and tenants pay the taxes it can still affect their ability to operate the business and be profitable with all in costs.

For MTNL the CAM above base rents lots of single operator to mulit unit inline retail tenants cannot absorb high property taxes that pushes their all in rent with cam too high to stay open. Cap rates tend to be higher in Illinois but you have to be careful where you buy.

What is the future of commercial retail and office space?

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